Colorado’s 208 Commission on Health Care Reform wrapped up its initial work in late May and will spend the summer figuring out how much each of the four health-care-reform proposals selected will cost us. Each proposal will take us a long way from the hands-off approach to the health care market we now have.

An unregulated, free market in health care is unlikely to function in the way we expect other markets to. The underlying product, private health insurance, is rife with “market failures,” and our society has no willingness to accept the consequences of a free market.

When we say that a free market delivers the greatest efficiency and quality at the lowest price, we base this on the assumptions that the market in question is transparent (i.e., information is readily available), that market transactions don’t concern others (i.e., no other people are affected by the exchange between buyer and seller), and that the incentives or rewards encourage sellers to minimize costs and maximize quality.

In the first instance, health insurance is plagued by information asymmetries. You know your health status, your health risks, and insurance companies don’t. That’s why they often exclude pre-existing conditions.

Insurance companies make a contract with you and your employer (if your employer helps pay for your insurance) to collect monthly premiums in exchange for the promise to pay “qualified” medical expenses. It would be great if insurance companies only thought, “Let’s offer the best service at the lowest price.”

Health insurance companies, however, can most easily increase profits by carefully selecting healthy families and individuals and avoiding the sick and frail. This makes it especially hard for small businesses and families to buy coverage if they have any history of medical problems.

Absent a mandate for individuals and families to buy health insurance, only those with the greatest likelihood of getting sick will approach private insurance seeking health coverage.

Unfortunately, this creates a “lemon’s problem.” Those requiring health coverage are also those who are likely to cost insurance companies the most. In short, there is a veritable fruit salad of failures in the health insurance marketplace.

American society doesn’t want the health insurance market to function like the private markets for life insurance or automobile insurance. If you don’t have insurance and you total your car, well, too bad for you. If you total my car, then in Colorado you might land in jail.

A life insurance company will not sell you a policy that makes you worth more dead than alive. So you cannot purchase $3 million of life insurance if you are only likely to earn $50,000 a year over your working lifetime. But we still require ambulances to pick up sick or injured individuals, whether or not they have health insurance. We require hospitals and doctors to treat the most desperately ill among us, regardless of whether they can pay or not. And most health insurance policies do not have lifetime maximums, meaning that many individuals receive far more in benefits that they will pay in premiums over their lifetime.

In other words, America has already implicitly agreed to socialize the costs of health risks.

The problem is that we have the most convoluted way of paying for this. We ask the sick to subsidize the care of the uninsured, and we ask the healthy to pay premiums above the level of benefits they receive. Of those who have no insurance, we ask them to forgo certain treatments and accept the risk that they might develop a condition that kills them too slowly to obligate a doctor or hospital to care for them, but too quickly for them to find any means of paying for care. An estimated 19,000 people die every year for want of health care because they don’t have insurance coverage.

Finally, all the incentives for health insurers and health providers are misaligned. Since people change their coverage so often, there is little incentive for insurance companies or HMOs to offer and deliver preventive care. Fee-for-service medicine rewards too much health care. But capitated payments – essentially what we pay to managed care providers like HMOs – have incentives to provide too little care. You receive the health care, but your employer pays the premiums. So there is little incentive on anyone in the system to make sure it functions as efficiently as possible.

High-deductible health plans – insurance that only kicks in after you have spent a certain amount of money – have been promised as the solution to all these problems. Unfortunately, people tend to forgo necessary care when they have high deductibles, which can end up costing everyone more down the road.

And there is little evidence that such plans reduce overall health spending. Most of the dollars spent in the system go toward care in the last year of life, and for big-ticket items like angioplasty, knee replacements and organ transplants. Plus, as much as 31 cents of every dollar spent on health care goes toward administration and marketing.

A market-based solution to our health system’s problems has limited curative potential – unless that market is carefully regulated and designed to encourage providers to compete on the basis of delivering the highest quality care at the most economical price.

Despite the broad acceptance today that regulation is bad and government inefficient, in health care there is a boat-load of data indicating that regulation and government involvement are the most effective and efficient means of addressing the most serious problems that plague our health-care system.